Unskilled Migration: A Burden or a Boon for the Welfare State

In a static setup, migration of unskilled labor may be resisted by the entire native-born population because, being relatively low earners, migrants are net beneficiaries of the fiscal system. However, the paper shows that with a pay-as-you-go pension, an important pillar of the welfare state, the dynamics are such that migration is beneficial to low and high income groups and the old and the young, provided that the economy has a good access to the world capital markets. This overall gain holds even though the migrants are net consumers of the pension system; they give to it less than they take from it. The pro-migration feature of the dynamic model is however weakened and possibly overturned when access to the world capital market is limited. In the case of low elasticity of substitution between capital and labor, earnings of native-born may be significantly affected, and the factor price effects can dwarf the effects of the migrants' giving to or taking from the welfare state on the native-born population.